Shift4 Payments, Inc. (FOUR) Q3 2023 Earnings Call Nov. 08, 2023

Here is a summary of the earrings call.

Jared Isaacman – Chief Executive Officer

Strong Quarterly Results:

• Records across all Key Performance Indicators (KPIs), including end-to-end volume, gross revenue, gross profit, and adjusted EBITDA.

• Margins and cash flow improving due to spread stabilization and disciplined expense control.

• Notable achievements in Q3: 36% growth in end-to-end payment volume, 23% growth in gross revenue, 34% growth in gross profit, and 24% growth in gross revenue less network fees.

• Adjusted EBITDA of $124.5 million, representing 46% YoY growth, with margins expanding by 780 basis points to 51.2%.

No Contribution from Recent Acquisitions:

• Successful Q3 results achieved without contributions from recently announced stadium and resorts processing.

• No revenue synergies realized yet from Finaro acquisition, which recently closed.

• Potential for strong Q4 performance with enterprise accounts starting to process as expected.

Successful Capital Allocation Strategy:

• Shift4 Payments sustains growth rates well above industry averages.

• Organic growth alongside M&A strategy.

• Organic investments include SkyTab POS and expansion into new verticals.

• Strong track record in M&A, identifying technology assets to unlock embedded payments opportunities.

• Approach is disciplined and focused on financial deleveraging within 24 months of acquisitions.

Unique M&A Approach:

• Proprietary pipeline and processes for M&A.

• Recent acquisition of Appetize showcased Shift4's ability to secure deals even at a discount.

• Shift4 leverages its strengths in technology and payment-related synergies to drive acquisitions.

• M&A strategy aligns with the convergence of software and payments for a more valuable commerce experience.

Growth Algorithm:

• Shift4's growth relies on "land and expand" and adding new merchants.

• "Land and expand" strategy involves capitalizing on existing embedded payments opportunities within the customer base.

• Success in converting gateway-only merchants to end-to-end and capturing opportunities in verticals like ticketing.

• The other half of growth involves adding new merchants attracted to software integrations and unique offerings.

Restaurant Vertical Success:

• Over 8,250 SkyTab POS systems installed in Q3.

• Strong growth in the restaurant sector with competitive cost advantages.

• Benefits from recent promotions and competitor challenges.

• Thousands of new restaurants adopting SkyTab POS, expanding Shift4's presence.

Hotel Vertical Expansion:

• Renewed and expanded relationships with prominent hotel clients.

• Partnerships with Pebble Beach Resorts, Sonesta Hotels, and SkyTouch Technology.

• Hotel wins include Ayres, Ocean House Hotel, Tiburón Golf Club and Resort, and Spinnaker Resorts.

• Land and expand approach contributes to growth without adding new hotel customers.

Expansion into Sports & Entertainment:

• Acquisition of Appetize expands market share within professional sports.

• Success with the Orlando Magic, San Francisco 49ers, Miami Dolphins, and college sports venues.

• Integration with Ticketmaster for primary ticket sales.

• Unique offerings in mobile technology and ticketing positions Shift4 as a leader in the sports and entertainment vertical.

Nonprofit Vertical Momentum:

• Partnership with Give Lively, powering donations for nearly 9,000 nonprofits.

• Focus on offering diverse donation methods, including crypto and stock.

• Integration with Ministry Brands and Endowment.

• Cross-selling card processing capabilities within the nonprofit sector.

Retail Vertical:

• Signed Landmark Rewards retail store in Philadelphia.

• Expanding presence in the retail sector.

Completion of Finaro Acquisition:

• Regulatory approval received for the European acquisition of Finaro.

• Material revenue synergies unlocked during extended regulatory approval process.

• Expansion into Europe and Canada with a focus on onboarding 10,000+ restaurants and hotels.

• Excitement about international expansion opportunities.

Sustainable Growth Rates:

• Demonstrated ability to gain share in end markets for over two decades.

• Exceeding 2023 volume guidance, with strong growth rates sustained through effective capital allocation and execution.

• Focus on automation, AI tools, and leveraging acquisitions to achieve strong margin and free cash flow performance.

Understanding of Integrated Payments Evolution:

• Success attributed to understanding the evolving integrated payments landscape.

• Capital allocation aligned with identifying talent and creating a motivated workforce.

• Strong culture of competition and customer satisfaction.

Taylor Lauber – President and Chief Strategy Officer

Q3 Performance Overview:

• Third-quarter volumes were in line with expectations despite the delayed closing of Finaro.

• Same-store volumes varied among merchant groups: hotels saw modest growth, restaurants remained flat, and retail experienced moderate decline.

• Encouraged for Q4 with the expectation of volume growth from ongoing projects and customers.

Gateway Sunset Initiative:

• In the second year of the gateway sunset initiative, focus remains on migrating gateway customers to the end-to-end offering.

• Roughly 50% of production and volume growth come from this migration, leading to a decline in gateway revenue but meaningful growth in end-to-end revenue.

• Very little attrition in the gateway-only population under Shift4's management.

Finaro Acquisition's Positive Impact:

• Initially sized at $30 million of EBITDA, Finaro's run rate EBITDA has exceeded $45 million.

• Significant growth in the underlying business, with around 13% card-present transactions compared to 3% previously.

• Approximately one-third of Finaro's revenue comes from Shift4's merchants.

• Legacy Finaro expected to contribute $15 billion of total volume in 2024, along with $9 billion in payment volume from international opportunities.

Appetize Integration and Expectations:

• Appetize is a business that has historically overlooked payments and burned cash extensively.

• Expectation of a temporary step backward due to discontinued revenue share programs and a shift away from legacy revenue streams.

• Confidence in the integration plan and positive conversations with Appetize customers eager to adopt the VenueNext platform and other benefits.

• Anticipated margin drag to be short-lived, with a run rate EBITDA of $15 million by 2024.

Capital Allocation Priorities:

• Prioritizing smaller M&A deals that align with the go-to-market strategy for restaurants, hotels, and stadiums in Europe.

• Discipline in waiting for favourable selling multiples positions Shift4 well to deploy capital for attractive returns.

• Commitment to opportunistic buybacks of the company's stock with excess free cash flow.

• No apologies for past smart yet contrarian investments, including Focus POS, VenueNext, Appetize, and smaller investments like SpaceX, which have delivered attractive returns for shareholders.

Nancy Disman – Chief Financial Officer

Strong Q3 Financial Performance:

• Q3 results include records for volume and gross revenue less network fees.

• Balancing top-line growth with disciplined investments led to strong adjusted EBITDA margin and adjusted free cash flow conversion.

Key Financial Metrics:

• Q3 volume increased by 36% YoY to $27.9 billion.

• Gross revenue for Q3 grew by 23% to $675 million.

• Gross revenue less network fees in Q3 increased by 24% to $243 million, as expected.

• Q3 gross profit was up 34% YoY to $171 million, with a strong gross profit margin of 70%.

Spread and Margin Metrics:

• The blended spread for Q3 was 64.5 basis points.

• Anticipate average blended spreads around 65 basis points for the full year 2023.

• Expect Q4 blended spreads to benefit from higher spread international volume and ticketing.

• Core, including restaurants and hotels, continues to maintain stable blended spreads.

General and Administrative Expenses:

• In Q3, total general and administrative expenses increased 3% YoY to $76.3 million.

• Focused on keeping headcount flat while investing in talent upgrades and driving operational efficiency.

Adjusted EBITDA and Free Cash Flow:

• Reported adjusted EBITDA of $124 million in Q3, up 46% YoY.

• Q3 adjusted EBITDA margin was 51%, representing over 780 basis points of YoY expansion.

• Q3 adjusted free cash flow was $76 million, bringing year-to-date adjusted free cash flow to nearly $200 million.

Balance Sheet and Leverage:

• Exiting the quarter with over $690 million of cash, $1.75 billion of debt, and $100 million undrawn on the credit facility.

• Net leverage at quarter-end was approximately 2.4 times.

Capital Allocation and Share Buybacks:

• Board approved $250 million of buyback capacity, with over $150 million remaining.

• Weighted average cost of debt is currently 1.35%, with no maturities until December 2025.

Updated Guidance:

• Tightening ranges for all key performance indicators (KPIs) and raising both low and high ends of adjusted EBITDA and adjusted free cash flow.

• Q4 guidance includes end-to-end volumes of $32 billion to $33 billion, gross revenue of $741 million to $766 million, and gross revenue less network fees of $274 million to $289 million.

• Anticipate adjusted EBITDA of $132 million to $140 million and adjusted free cash flow conversion to be at least 57%, up 500 basis points from initial guidance.

Factors for Q4:

• Cautious outlook due to macroeconomic environment.

• Closing of Finaro removes uncertainty around international expansion efforts.

• Legacy M&A expected to contribute $25.6 million to gross revenue less network fees and $5.8 million to adjusted EBITDA.

• Higher SaaS revenue from SkyTab POS installations, increased contribution from ticketing, and large hospitality and stadium wins anticipated in Q4.

2024 Volume Bridge:

• Anticipate incremental volume from annualizing merchants boarded in 2023 and land-and-expand execution across verticals.

• Total embedded payments opportunity of over $180 billion, with approximately 80% represented by gateway-only merchants.

• Expect $15 billion of volume contribution from legacy Finaro.

Overall, Shift4 is positioned well, even in the current macroeconomic environment, due to the strong balance sheet, cash generation, and profitable growth.

Q&A followed.

Anne Chapman

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